Chantal Marx | Head | Investment Research | FNB Wealth and Investments Solutions | mail me |
South African fuel prices increased again on 3 November and petrol price is now at 33.9% this year with the Automobile Association of South Africa (AA) warning that R20 per litre could still be on the cards for by year end.
The main reason for the pressure on local fuel prices has been a sharp increase in the brent crude oil price over the past few months.
This in turn was drive by shortages of natural gas in Europe and Asia just as the northern hemisphere entered winter.
Source: Bloomberg
How fuel prices are calculated
The fuel price in South Africa is comprised of four main elements.
Basic Fuel Price
The basic fuel price makes up roughly 42% of the total price of fuel. The Basic Fuel Price is made up of the purchase price of fuel (in US dollars) as well as freight costs, insurance, storage, and financing.
In South Africa the fuel price is adjusted on the first Wednesday of every month and is determined by two main factors: The Rand/US Dollar exchange rate (how fuel is purchased), and international petroleum prices (how much the fuel costs to purchase).
Wholesale and retail margins as well as distribution and transport costs
The final contributors to the gross petrol price are those costs associated with transport and storage, custom and excise duties and retail margins for fuel station owners and makes up roughly 22% of the total fuel price.
The GFL
The general fuel levy, which makes up roughly 23% of the total price of fuel. The GFL goes to National Treasury. Government is free to utilise this levy in a manner it deems fit.
RAF Levy
The road accident fund levy, makes up roughly 13% of the fuel price. These funds can only be utilised for road accident claims.
The impact of higher fuel prices
Higher fuel prices have a knock-on effect on South African consumers:
- Motor vehicle running costs: Vehicle owners will immediately feel the impact and will be paying on average an extra R1.21 per litre of petrol and R1.45 for diesel R1.45. For the average car with a 50-litre fuel tank, consumers will pay an extra R60,50 to fill up their vehicles in November.
- Transport costs: An increase in fuel prices, means higher costs for companies to operate bus and taxi services. These costs are passed onto the consumer.
- Consumer goods: An increase in the fuel price impacts the cost of consumer products to an increase in logistic costs. An increase in logistic costs is typically passed onto the consumer, with a basket of goods costing the South African more money as a result.
Expectations for the Brent crude oil price and petrol prices
Source: FNB Economics, FNB Wealth and Investments
The supply-demand imbalance arising with improved mobility and a slow increase in oil output, together with a switch from natural gas to oil should place upward pressure on oil prices going into the first half of next year. This will continue to be the major driver of elevated fuel prices, but a weaker rand will add to this pressure.
We currently see the current R19.54 price for 95 unleaded as the peak but risks are to the upside. In any event, we expect fuel inflation to continue in the double-digits until March 2022 before we start benefitting from high base effects and fuel inflation moves into negative territory in the second half next year.
Investment considerations
To offset the impact of rising fuel prices on one’s own pocket as well as your investment portfolio (which may have considerable consumer exposure), investments in the oil space may have an offsetting or hedging impact.
Types of oil exposure available to SA investors:
- Direct shares: Investing in oil company shares is one of the simplest methods to obtain exposure to oil prices. The change in the oil price will affect the profitability of the company and in turn, its share price. There are, however, other factors that must be considered like hedging strategies put in place and the underlying fundamentals of the company invested in. There are many oil companies globally to invest in to gain oil price exposure. Locally, the only direct oil play listed on the JSE is Sasol. Internationally – our preferred exposures are Shell and Vermilion Energy.
- International oil company ETFs: Oil company ETFs track the price of a basket of global large cap oil company shares. For example, the iShares Global Energy ETF or SPDR S&P Oil & Gas Exploration & Production ETF. iShares or SPDR will physically own the shares that are being tracked by the index. The price of the ETF will track the price of the basket of oil stocks. The share prices of the underlying stocks will be driven by the fundamentals of the companies, including profitability which will be determined by the oil price (among other things). Owning an oil company ETF has the advantage of adding leverage (within underlying companies) and diversifying exposure.
- A local oil ETN: An ETN provides exposure to the movements in the price of a commodity or other instrument without ever outright owning the commodity. Instead an ETN uses derivative contracts to gain exposure to the asset price it wishes to track. In South Africa we only have one JSE listed oil ETN, namely the Standard Bank oil ETN. This ETN tracks the Brent crude oil price in Rands.
- An international oil ETN: International ETNs work the same as locally listed ETNs however they are not listed on the JSE and are quoted in another currency. The United States Oil Fund ETN is the world’s largest oil ETN and tracks the West Texas Intermediate crude oil price. The United States Brent Oil Fund ETN tracks the Brent crude oil price.
- Finally, investors can consider using derivatives or buying futures contracts directly, however, we would caution against taking this course of action, due to the risks associated in managing these exposures.
In conclusion
It is important to note that not all investment options in this space may do well since we anticipate the rand oil price to remain elevated over the medium term but that it is at or close to its peak.
Direct company exposures will probably make the most sense since high oil prices will translate into higher cash flows if oil prices are elevated which could support valuations. Investing in oil price ETFs and ETNs could prove disappointing should our view play out.